Last week, Enterprise Product Partners declared its 29th consecutive quarterly distribution increase. The board of directors of the General Partner increased the distribution rate to 61.25 cents/unit. This represented a 5.20% increase over the distribution paid in the third quarter of 2010. This dividend achieverhas increased distributions in every year since 1999. As a unitholder, it pays well to get paid a high yield while also having my income increased over time. Check my analysis of the partnership.

Enterprise Product Partners is organized as a master limited partnership, where income and cash are proportionally distributed to unitholders. Since it is a partnership, shareholders are called unitholders and dividends are called distributions. With MLPs, typically only a portion of the cash distributions is taxed as ordinary income. The remainder represents a tax deferred distribution, which reduces the partner’s cost basis in the partnership. If the partner sells, this would translate into higher capital gains taxes they have to pay to the IRS.

The return of capital deferral is a result of depreciation on the massive capital assets that the partnership owns. Just like with real-estate, even if pipelines are fully depreciated on the company’s books, they will likely be in a good condition for continued exploitation. As a result, an important metric to use with MLPs is distributable cash flows. The partnership maintained a distribution payout ratio of 77% in 2010. Enterprise is also one of the few partnerships which have no incentive distributions rights for the general partner.

I will be considering adding to my position in the partnership on any price declines. The yield of 5.70%, coupled with solid distribution growth potential make this company a buy.

Master Limited Partnerships offer high yields and distribution growth which exceeds inflation. They do have certain risks as well however. What is your opinion on MLPs in general and EPD in particular?